Lock-ins For Loans Protect Buyers

May 07, 1988|By Lew Sichelman.

Now that mortgage rates are starting to inch upward again-and indications are that rates will continue to rise the rest of the year-home buyers would be wise to seek ``rate locks`` when they apply for a loan.

A rate lock, or ``lock-in,`` is mortgage-speak for the lender`s guarantee for a specified time of an interest rate quoted to you.

Generally, the promise is good for 45 to 60 days if the rate is locked in at the time you apply for a loan, or for 15 to 30 days if the lock-in starts on the day your loan is approved.

Obviously, to protect yourself against any sudden, unexpected increase in the cost of mortgage money, it`s best to obtain a rate lock when you apply.

If you don`t get such a pledge-in writing-the rate you end up with, and therefore the monthly payment, could be higher than you expected. Or, worse yet, if rates rise too much, you may fail to qualify altogether.

That`s what happened to thousands of would-be borrowers last spring, when lenders, under a crush of requests to refinance older, higher-rate loans, couldn`t process applications fast enough to meet the demand for mortgage money.

In truth, some lenders purposely dragged their feet so they would miss deadlines and wouldn`t have to fund loans that were at the market rate when they were promised, but were below market when it came time to close.

For the most part, however, lenders just couldn`t keep up, and neither could appraisers, surveyors or, for that matter, settlement attorneys.

Even so, most lenders stuck to their commitments, giving their borrowers what were, in effect, below-market mortgages. Some even made good on their pledges although it forced them out of business.

Nowadays, refinancings have trickled off to only a small portion of loan volume, and lenders are processing such loans faster than ever before.

However, though some say they can give you a decision within 21 days, it still takes most lenders anywhere from 30 to 45 days to collect and go over all the necessary reports and verifications.

But even at that speed, many lenders are reluctant to lock in rates until they`ve approved the loan, because interest rates are so volatile.

If your lender doesn`t offer a rate lock at the time of application, you might offer to pay a small portion of his or her charges in advance, say 1 percent of the requested mortgage amount.

This fee, which would be part of what you`d pay at settlement anyway, and would also be refundable if you`re turned down, will show the lender that you are, indeed, a serious borrower.

Knowing that you are almost certain to close if you are approved, the lender can hedge his own risk that rates may rise even higher.

Also, by putting your money where your mouth is, you are telling the lender that you understand that a commitment is a two-way street, that you won`t run down the street to get a better deal from the competition if rates should suddenly reverse their field and start to tumble.

If your lender does promise to lock in today`s mortgage rate for, say, 60 days, with or without an advance from you, don`t just take his word for it that he will meet his deadline.

Many borrowers did that last year, and ended up paying dearly in time, aggravation and money.

Take a look at the lender`s track record for closing on time. Check with your local consumer-affairs agency and Better Business Bureau to see how many complaints have been made against the lender and, more importantly, how they were resolved.

Lenders that are automated, he notes, usually can complete the task much more rapidly than those that rely on old-fashioned manual methods.

Also, give the lender a helping hand. Make sure you supply the lender with everything asked for as quickly as you can, and make sure that others involved in the process-your employer, for instance, and your bank-act fast, too.

Another way to beat the rate-lock deadline is to apply for a loan before you find the house you want to buy. That way, once you discover the place of your dreams, you can move right along to settlement without delay.

``Pre-approved loans are a tremendous advantage to the borrower in providing insulation against unexpected delays,`` according to Anderman.

``They eliminate last-minute surprise.``

When asking for a rate lock, make sure the lender also guarantees the number of points you`ll be charged.

If not, the lender can maintain the quoted rate and make up for higher market rates by increasing the number of points (each point is 1 percent of the loan amount) you`ll have to pay.

Also, be on the lookout for fine-print escape clauses that let the lender off the hook.

Your failure to qualify is a legitimate excuse to cancel the commitment, as are an appraisal that falls short of the contract price, your failure to close on time, or the fact that a third-party beyond your or the lender`s control fails to provide the necessary documentation.

However, terminology that releases the lender from the pledge because rates have changed more than a certain amount, say 1 percentage point, or because the government-administered VA rate has changed, is questionable.

Lew Sichelman is a syndicated housing columnist based in Washington, D.C.